Monday, December 27, 2010

Let’s assume you have $20,000 to invest and have 15 years to retirement. by Ravinder Tulsiani

Let's assume you have $20,000 to invest and have 15 years to retirement.

You take your savings and invest it into the stock market directly
or through mutual funds and make no further payments. What
is the chance that your $20,000 will grow to $200,000 in 15
years? Let's just say, you would need over 16% return annually!
But for the purpose of this illustration, let's assume you are able
to achieve this.

Now that you're retired, you start to draw on these funds (for
example $1,000 monthly), this asset begins to deplete. Because
it's a depleting asset, most retirees hope that their funds will last longer than they will; if anything is left over, they can give to their children etc…

Alternatively, you take your $20,000 initial savings and use that
as a downpayment to buy a $200,000 rental property today.
Over the same 15-year period, the tenant pays off your mortgage.
Without factoring in appreciation or any positive cash flow (which
is highly likely), you still end up with a $200,000 property fully
paid off.

Now, the rental income produced from the property (let's say
$1,000 net of holding costs monthly) goes in your pocket and
you don't touch the asset… it does not deplete, in fact, it will
likely appreciate during your retirement years as well.
So what can you do with this appreciating asset after you're gone…
I suggest a trust that prevents the beneficiary from ever touching
the asset and have only access to the revenue the property generates, that way, your children or grand-children will be virtually guaranteed a monthly income of $1,000 for life generated from the rental property.

Imagine, what you would have done differently in your life if
someone had left you with guaranteed monthly funds? Would
you have made the same choices in your job, finances etc… that's
the legacy you can leave to your children through real estate rather
than the usual left-overs most people leave through depleting

This goes back to one our fundamental philosophies; every
Canadian should have two properties:

The property they live in.

A rental property to achieve financial freedom.
If you do that, the question remains, what should you do with
your own property once you pass on? Simply provide a provision
where your property is also put out for rent and your beneficiaries
only have access to the cash flow and not the asset. Now, your
beneficiaries have $2,000 per month coming in guaranteed. How
would that change their life?

Note: For most people $1,000 per month will not nearly be
enough to retire on. The numbers used in this example are not
important; it's the idea that I want to get across. Buy assets
that will provide you with the cash flow at retirement without
depleting the assets. If you need higher cash flow, buy more than
one property over time.

About the Author

Ravinder Tulsiani is a published author who has written about personal finance, real estate, self-help and online marketing.